Auto, weather losses spur outlook downgrade for State Farm

Credit rating agency AM Best has revised the outlook for State Farm Auto Insurance and its subsidiaries to negative, citing falling auto premiums and weather-related losses.

AM Best, in a recent release, said that while the underlying financial strength of the giant insurer remains strong, its outlook downgrade from stable “reflects recent adverse underwriting experience in the private passenger auto insurance line of business and the challenging regulatory environment that have constrained the ability of State Farm…to increase premium rates in a timely fashion, along with continued elevated catastrophe-related loss experience in many parts of the country.”

State Farm is the nation’s largest personal lines insurance company based on direct premiums written. It is the leading provider of private passenger automobile and homeowners’ insurance in the U.S.

2022 record loss of $13.4B

State Farm reported an auto insurance underwriting loss for 2022 of $13.4 billion, its biggest ever. The company said its record underwriting losses were the result of rapidly increasing claims severity and significant additions to prior accident year incurred claims. While it made money in its homeowners and life insurance lines, auto accounts for nearly 62% of State Farm’s business.

The 2022 underwriting results “reflect significantly higher auto lines incurred claims as well as higher homeowners non-catastrophe incurred claims and another year of catastrophe activity across the country,” the company said in a statement in which it also said it paid $7 billion in catastrophic loss claims.

Despite State Farm’s net worth sinking by 8%, to $131 billion, partly from a decrease in the company’s stock portfolio along with the operating losses, AM Best said the company’s current financial position remains strong.

Balance sheet strength

“The ratings of State Farm Group reflect its balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, very favorable business profile and appropriate enterprise risk management (ERM). Additionally, the ratings reflect State Farm Group’s long-term record of profitable, if occasionally somewhat volatile, underwriting and operating performance and internal capital generation,” the credit rating agency said.

In its guide to credit ratings, AM Best says a negative outlook indicates that the company or its securities are experiencing unfavorable financial and market trends, relative to its current Best Credit Rating or other opinion type.

“If these trends continue, the entity/issuer or security has a good possibility of having its credit rating downgraded,” the guide says.

State Farm is hardly alone among its peers facing auto insurance losses and huge catastrophe-related claims, though it may be the first to have its outlook downgraded by AM Best.

The US private auto insurance industry last year reported its worst underwriting results in more than two decades. The net combined ratio for the sector, when excluding policyholder dividends, was 111.8%, topping the previous high over the past 27 years, according to an S&P Global Market Intelligence review of available annual regulatory statements.

“A combination of inflationary pressures, adverse prior-year development and Hurricane Ian contributed to the 111.8% figure,” said the Global Market Intelligence review. “While rising premium rates have yet to catch up to the losses insurers are sustaining, Market Intelligence projected in October 2022 that the business line should be close to breakeven in 2024 and see a sub-100% combined ratio in 2025 and 2026. A combined ratio below 100% generally indicates underwriting profitability.”

Attempts to reach State Farm for comment on the AM Best downgrade were unsuccessful.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.